When the market is having a bad month and pundits like Jim Cramer are trying to figure out how to “game” the pullback, FIRE bloggers start implementing their own version of gaming the system: tax loss harvesting. Bloggers like the Mad Fientist and Physician on Fire have written great articles on tax loss harvesting. The biggest downside to tax loss harvesting is increasing your future capital gains, but I’d like to share how those who give to charity can wash away those gains that they incur during tax loss harvesting.

Stocks are falling but, like him, they’ll bounce back up eventually…

The premise behind tax loss harvesting is to “harvest” the losses in a taxable account while maintaining your market position. Remember, this is for TAXABLE accounts only. You’ll only be gaming yourself if you try this in a 401k or IRA. While there are many articles on the mechanics of tax loss harvesting, I’ll provide a quick summary to refresh your memory.

The trick to tax loss harvesting is to take an investment that has depreciated in value since you purchased it, sell it and immediately purchase a similar but NOT IDENTICAL investment. Here’s a quick example of the way that this looks in practice:

Now what did you just do? You sold your shares of VTSAX, which locks in your losses of $3500. Now this sounds like a dumb thing to do, but remember, you really just turned your shares of VTSAX into shares of VFIAX. Now these are obviously not going to perform exactly the same, but they track each other really closely. So, when the market climbs back up, your VFIAX shares follow and you get to ride the gain back up. The IRS will let you use the losses to reduce your capital gains for the year and then use up to $3000 of your remaining “losses” to reduce your income for the current year. The losses that you can’t use this year (over the $3000 limit) can be carried over into the future to offset your future income.

Ok, it’s a little more complicated than that… There is an IRS rule called the “wash sale” that invalidates any tax loss harvest if you buy substantially identical assets 30 days before or after a tax loss harvest. This includes accounts like your IRA and even dividend reinvestment, so you need to make sure that you are not reinvesting dividends in your taxable accounts and that the funds you are using in your taxable accounts are different from your retirement accounts to avoid a wash sale. You also should learn about the specific ID (SpecID) means of identifying specific shares so that you can harvest only the shares of a given fund that have losses.

So, why the brief foray into tax loss harvesting when the topic has been covered much more thoroughly by others? Well, I really want to focus more on a specific strategy to deal with one of the drawbacks of tax loss harvesting.

The Drawback to Tax Loss Harvesting

The biggest downside to tax loss harvesting is that you are not actually avoiding taxes! You are DEFERRING them. Now, as a physician, I have intimate knowledge of delayed gratification, but this is delayed punishment! If I reference the example up above, by tax loss harvesting, you reduced your income for this year by $3000 and carried the $500 loss forward for next year, thereby saving you from paying your marginal tax rate on that amount. Now that you’re congratulating yourself on having found a legal “loophole”, you have to go back and look at your basis in your funds. When you originally purchased VTSAX at $70/share, your basis in those 100 shares was $7000. By performing the tax loss harvest, your basis is now $3500. If those shares appreciate to $140/share by the time you actually decided to sell the fund (take the money and run), you would have owed taxes on $7000 in gains ($14000 current value – $7000 basis). Now that you’ve done your fancy tax loss harvesting, you now owe taxes on $10500 ($14000 current value – $3500 basis). Remember, when you did the harvest, you bought $3500 of VFIAX after selling VTSAX at $35/share so that reduced your basis.

When you tax loss harvested, you just created $3500 in future long term capital gains in order to reduce your current income by $3500. If you are currently in the top tax bracket, that means that you saved $3500 x 0.396 = $1386. If future tax rates on capital gains are the same as today, you’d pay anywhere from 0% to 20% tax on that $3500 when it comes time to sell the stock. Assuming a 15% rate, you’d pay $525 in future taxes, so you gained $1386 today and lost $525 in the future for a total gain of $861 for your tax loss harvest. This is still pretty good, but remember, if your current marginal tax rate is lower and future capital gains rate end up higher, you could end up with significantly less benefit. Even in the worst case of low current income tax and higher future capital gains tax, when you consider the time value of money, this still probably works out in your favor. However, if you currently give to charity in a significant way, I have a better deal for you!

It Takes Two to Tango or Washin’ Away Those Gains

This guy’s dancing, but I wouldn’t want to tango with him!

I started tithing long ago when I first met my wife and we have continued to increase our giving over time. Until recently, I would just take a percentage out of each paycheck, give to our church and the organizations we support on an ongoing basis, and let the money that was not already earmarked build up in my savings until the end of the year. Then I would donate it all at once to the other organizations that I wanted to support. At tax time, I would claim my charitable deduction for the year and that was that. But after learning about the Donor Advised Fund (DAF) from reading Physician on Fire, I came up with a better strategy.

One great thing about a DAF is that it allows you to easily donate stocks. You donate stocks to the fund and the fund liquidates the stock without triggering a taxable event because it’s a non-profit. Then you can have the fund send grants to the organizations that you would usually support. This is so much easier than contacting each organization to try to get them to accept stocks or mutual funds directly. The beauty of this is that you can now donate appreciated stocks and mutual funds to your church or other charitable groups.

So, the way I implement my strategy is that, instead of donating money directly to charity, I find my funds that have appreciated the most and then donate them to charity using the DAF. I then immediately repurchase the funds with the cash that I would have otherwise given to charity. This is what it looks like using the earlier example:

It’s been a good year, so at the end of the year, your shares of VFIAX are now worth $7000 again, so you have $3500 in gains

You were going to donate $7000 cash to Médecins Sans Frontières (MSF) at the end of the year, but this year you give your shares of VFIAX to your Donor Advised Fund and then send a $7000 grant to MSF from your DAF

Then you take the $7000 cash you would have donated and immediately repurchase shares of either VFIAX or your original VTSAX.

MSF has the $7000 you wanted to give them

Your basis in your fund has increased from $3500 to $7000, so you washed away the gains you incurred during your tax loss harvest

You still get to claim a $7000 charitable donation at tax time!

So there you have it! You get the benefit of claiming a “loss” on paper that reduces your income taxes for the year, you get to wash away the gains from your harvest and you still get the charitable deduction on this year’s taxes. Your charitable organization even gets the same donation that they would have if you had given them cash. So tax loss harvesting and charitable donations dance a mighty fine tango together!

]]>http://nomadswithavision.com/2018/10/28/the-tax-loss-harvesting-charitable-giving-tango/feed/4167Cuba Cruise and FinCon 2018http://nomadswithavision.com/2018/10/08/cuba-cruise-and-fincon-2018/
http://nomadswithavision.com/2018/10/08/cuba-cruise-and-fincon-2018/#commentsMon, 08 Oct 2018 01:35:13 +0000http://nomadswithavision.com/?p=132 Read More Read More]]>Ok, I know that I’ve been SUPER negligent in posting on this blog after my first post, which was almost a year ago. But, I’ll be slowly making up for it. Before I start a series of posts on my background story, I wanted to tell everyone about my Cuba cruise and FinCon 2018 experience, which inspired me to start working on this blog again!

Cruising to Cuba

Our ship, the Majesty of the Seas

Meeting the “FI crew”

My family’s journey to Cuba started when I read a post by Physician on Fire. He invited readers to join him on a cruise to Cuba before FinCon 2018 started. I thought this would be a great opportunity to meet PoF and to give my kids a chance to experience their first cruise. I also wanted to take the opportunity to check Cuba off my bucket list, taking advantage of the fact that Americans are currently allowed to travel to Cuba because, who knows, this may not be an option in the future.

I ended up getting way more than I expected. Not only did I had the chance to meet Physician on Fire and his family in person, I had an amazing time and made a bunch of new friends. There’s something about a shared passion and long, intense conversations that forms fast friendships. I met the Waffles on Wednesday, Dr. Cory Fawcett and his wife, the Frugally Reckless couple, Dr. B.C. Krygowski and her husband, Fire Up the Couch and a great Florida pathologist.

As is typical when you meet people from the FI/RE tribe, we discussed finances and investments, but more importantly, we talked about our passions and dreams. Although many of us are complete financial nerds, we all realize that finances are just the tool that frees us to pursue our passions. I have yet to meet anyone from the FI/RE community who is sacrificing and striving to obtain financial freedom in order to watch TV and play video games all day… Even those whose goal is full time travel almost always have passion projects that they want to spend their “retired” life pursuing.

Royal Caribbean

As far as the cruise itself, I’ve found that I prefer Norwegian to Royal Caribbean, or at least this ship. The food was decent, but the ship was relatively small and it was hard to find a quiet place to just talk and relax. The quiet places were usually outside on the decks, where my family and I often found ourselves surrounded by cigarette and cigar smoke. We also struggled with making it to dining room at the assigned dinner times. In our daily life, we tend to eat dinner at around 7 to 8 pm because I often work into the late evening and we want to eat dinner together as a family. On the cruise, our group dinner reservations were at 5:30 pm, so I often ate with the group and then later with my kids at the buffet. My desire to do things my way and not have rules and restrictions may play a role in my drive for financial independence…

The Sunshine Skyway Bridge

Cuba

Yes, the old cars were out in full force…

Cuba has always been on my bucket list due to the allure of visiting a land that has only been recently accessible to visitors from the US. I love Cuban food here in the US and I was excited to engage with the food and culture on the island. My actual experience was educational, but less than I hoped.

Due to restrictions against visiting Cuba for simple tourism, we had to participate in a sanctioned tour that met the US government criteria to visit the island. It was through this tour and the shipboard informational lectures that I learned that the Cuban food that I enjoy so much is best experienced outside of Cuba. Unfortunately, resources are scarce on the island and supplies of ingredients are limited. The delicious roast pork and smoked ham that I enjoy on my Cuban sandwich are only available to locals on rare occasions and most “Cubanos” in Cuba are closer to the ham and cheese sandwich made with Wonderbread that I would get as a kid. My guide told me that when one of his children was in diapers, the island had a diaper shortage, with none to be found for months. He said that stores will usually have only one or two brands of staples like toilet paper and you have to buy what you can find. He jokingly said that it keeps you from being stressed out from having to make too many decisions. It is amazing what we Americans take for granted in our every day lives.

On the tour, I was surprised to see modern vehicles on the road along with the classic cars that you always see in pictures. The majority of the vehicles were Russian, Asian or European makes, but I did see a late model Chevrolet or two. The iconic classic cars that you find in Cuba are usually a hodgepodge of parts because original parts weren’t available when repairs needed to be made. Some of the cars have even been converted to diesel engines and others use random parts such as motorcycle brakes.

When our attention was directed towards a specific landmark or in a certain direction, I tried to always take at least a quick look in the opposite direction. This is how I found that our attention was almost always directed away from the most rundown parts of the city. Some of the neighborhoods were almost post-apocalyptic in appearance. They were full of decaying buildings with crumbled facades lying in the dirt street. It was a marked contrast to the relatively well-maintained colonial buildings that you find in the tourist areas. Our tour guide told us that many buildings are apartments or single family residences that have been split among three or four families.

When I was in my Master’s of Public Health program, I took an interesting course that included refugee camp management. When planning sanitation in a refugee camp, it is recommended that relief agencies transition people as quickly as possible from defecation fields and latrine trenches to individual outhouses for each family. They found that sanitation markedly improved when each family had their own outhouse because once it was “theirs”, people began to take much better care of the outhouse than when it was community property. I see this idea being played out in Havana; when many families share a residence, they may care for their own personal living space more than they do community property like the building exterior. Of course, this is greatly exacerbated by the extreme poverty on the island.

Despite the hardships that they endure, the Cubans that I met were bright and friendly. Compared to being mobbed by aggressive taxi drivers in places like Managua, Nicaragua, the people were polite and helpful. Even in the public parks, when sketch artists came to sell their art and women dressed in traditional clothes came to offer photo opportunities, they were respectful and not unduly pushy. In the end, I feel that our time in Cuba was too short to do more than scratch the surface. I would love to have had more time to explore the island and get to know its people.

FinCon 2018

Connecting With the Tribe

FinCon was unlike any other conference I’ve ever attended. Unlike the medical conferences that I usually go to, the magic at FinCon happens outside of the conference rooms. It’s sort of like a cross between a typical conference and a family reunion… With pink flamingos… And beer… And people drinking beer in pink flamingos…

Instead of attending lectures all day as I usually do, I went to a few lectures that I was really interested in and then spent the rest of my time building relationships. Face it, most people who are pursuing financial independence are embracing a counter-cultural lifestyle (at least until messages like Playing with Fire reach everyone). So, it’s fantastic to be surrounded by like-minded people all pursuing freedom. Strangely enough, for a group of people who obsess over the intricacies of budgeting and investing, very few of my conversations were actually about budgeting or investing.

Most people were talking about their dreams and passions, reveling in the sense of community. It was a safe place to talk about taboo subjects like leaving your career to pursue a life with more meaning. One of the keynote speakers, His and Her Money, urged us to seek to have an impact with our message. This resonates with me as I look to start chronicling my family’s journey together. This journey is about continuing to build our relationships as a family, but just as important, to serve others and have a positive impact on this world.

For those I met last week, thank you for the wonderful time and I’ll see you next year!

We are a family of five on the path to financial independence. We are planning on traveling with our kids 3-6 months a year, worldschooling and seeing the world with them. We have been given the amazing privilege of growing up and living in a developed country and I (Mr. Nomad) have been blessed with a fantastic job that has made it possible to achieve our dreams so quickly (though discipline is definitely a big part of it). We are growing more excited as we see our financial milestones continuing to be met and our time to break out of the Matrix growing closer. It certainly hasn’t been an easy journey so far, but it sure has been rewarding. I know that our family bonds will continue to grow stronger and our satisfaction will continue to increase as we get closer to our goals.

It all started almost 20 years ago when I met Miss Nomad. We both had a love for traveling and a thirst to see the world as well as a heart for people in the developing world and a desire to serve as missionaries internationally. We had both grown up living a relatively itinerant childhood and feel that much of our character was formed by coming into contact with people from all walks of life.

After a whirlwind romance, we met and married within a year, we……stayed in our home country for the next 20 years. We sure tried to get out and see the world, exploring paths like the Peace Corp, an overseas dissertation for a Ph.D., and an international residency, but nothing panned out…

We did continue to move around nearly constantly, as jobs and school would allow, moving almost yearly until the kids began to come. Since then, we’ve toned it down to one move every 4-5 years. We’ve seen much of our home country, and quite a bit of the surrounding countries, and we have been to around 15 countries on 4 continents. But our dream to raise our kids in another culture has yet to be realized.

Hence the financial independence: not being tied to a job unless we choose to be tied. We have been very careful financially to save up for our retirement, our kids college, for emergencies and rainy days, living way below our means so that we could achieve freedom. For us, this means not having to save anymore with each paycheck – giving ourselves the ability to earn just enough for our daily needs. If then we move to a cheaper place (geographic arbitrage), this money goes much farther. My current plans are to start working half time in the near future. More on that development in future posts.

Well, that’ll do for a “hello world”. I’ll plan on updating as I can, but it may be a while before I can work up to regular scheduled updates. Cheers!